Plan 2 Student loans have become the focus of scrutiny since Rachel Reeves announced a 3 year freeze on the repayment threshold, which had previously risen with the Retail Prices Index (RPI). This decision faced backlash, with money saving expert Martin Lewis arguing that it is ‘unfair to all’ graduates on plan 2.
While Burnham is yet to explicitly announce his plans to deal with the student loan crisis, his previous policy choices, newly appointed ministers and other parties’ proposals might give us an indication of what he might do.
So how do student loans actually work? There are four main factors at play: the repayment threshold (how much you earn before you begin repaying); repayment rate (what percentage of your income over that threshold is paid); interest rate (how much is the debt rising) and write-off period (at what point is the debt written-off). Different demographics of graduates would be affected by adjustments to each factor, making any potential changes a political question.
As Reeves’ decision to freeze the repayment threshold was what initially sparked outrage, Burnham’s likely first course of action will be to reverse this, and have it rise with RPI as originally planned. The Liberal Democrats would like to go a step further and have the repayment threshold increase in line with average earnings; this would lower graduates’ immediate monthly payments but could cause outstanding balances to grow further. This would particularly benefit lower and middle paid graduates, as they are unlikely to pay off their loans in full anyway, meanwhile wealthier graduates could offset the potential negative side effects of this by overpaying their loans. However, this plan would potentially reduce government income from student loans significantly.
Another approach could be to adjust interest rates on plan 2 loans. These are currently set to a maximum of RPI plus 3%, which has been called ‘egregious’ by new Education Minister Lucy Powell. The Conservatives have suggested capping these at RPI; however, according to the Institute for Fiscal Studies (IFS), this would only really have a material impact on higher earners who would pay off their loans faster, with these benefits felt later in life. As the financial policies that Burnham has announced so far seem to focus on ‘small wins’ that help people right now, it is unlikely that they will reduce interest rates as this has little to no impact on graduates’ short term finances and has the potential to cost the exchequer billions.
The campaign group Rethink Repayment has proposed a combination of reforms,including lowering the interest rate to CPI, raising the repayment threshold in line with average earnings and reducing the repayment rate from 9% to 5%. These reforms would approximately half monthly repayments and lifetime payments for 2022/23 cohort, with middle earners benefiting the most. However, it is extremely unlikely that the Burnham government would implement this combination as it would cost the exchequer £12 billion for 2022/23 cohort alone, and would reduce the number of graduates fully paying off their loans from around 50% to around 30%. This could force the government to cover the shortfall by raising other taxes, which would be very unpopular within wider society.
A combination that the government is more likely to consider has been proposed by the IFS. They project that the negative impact on the treasury of reducing repayments to 5% could be offset by increasing the write off period by 9 years. While this ‘cost-neutral’ strategy would not reduce the total that graduates pay over their lifetime, it would drastically reduce the financial burden that the loans cause today, which could make it particularly attractive to the new prime minister.
Finally, as ex Vice Chancellor of the University of Arts, London, Burnham’s new chief of staff James Purnell has long been vocal about the need to reform the student loan system. In 2022 he commissioned London Economics to model alternatives to the system, and has talked of replacing it altogether with a ‘graduate tax’. Interestingly, doing just that was one of Burnham’s pledges in the 2015 leadership campaign. If combined with means tested maintenance grants, this would be extremely progressive as it would allow the government to directly fund universities while supporting lower income students. However, this is an extremely radical proposition and is unlikely to be implemented without an electoral mandate.
With Powell suggesting that student loan reform is ‘at the top of her in-tray’ and John Healy’s first budget set to be announced on the 28th of October, it will certainly be interesting to see what the government might do to tackle this crisis.
